The Psychotic State
			       Number 7
			    March 16, 1998

			   Buyer Be Where?


I find an odd conjunction between my interest in antiques and my
career in a high-tech industry.  Even when I was a pretty small kid I
was always fascinated by history and archaelogy, and I coveted old
things.  My interest however is not uniform - I am not particularly
enamored of old furniture, art, or clothes.  What I really can't
resist is old technology.

I am not much of a packrat, so I don't buy all the cameras, computers,
radios, and phonographs that I find.  Recently however, I have been
indulging myself in buying old records: mostly the shellac 78RPM
variety about which I discoursed a few months past.  As you would
expect, these can be found in flea markets, junk stores, Salvation
Army outlets, and the like.  They can also be purchased on the
internet.  I have bought these on the web at two places: one is
www.78rpm.com, a site run by Nauck's Vintage Records, an auction house
in Texas; the other, as you might have guessed, is EBay.

It's often quite difficult to know how much an old record is worth.
The flea markets tend to charge pretty much the same for them no
matter what's on them, something in the range of a 50 cents to a few
dollars.  To my knowledge there's only one book that purports to be a
price guide (The American Premium Record Guide, by Les R Docks) and it
is far from complete.  Most records are not worth much above what they
get for them in the flea markets - some not even that much - but there
are some that will go for very, very much more.

What I am describing is called an illiquid market, and it's
characterized by several features:

a) There's no obvious place for buyers and sellers to meet, and
accordingly they can't always find each other easily.

b) There aren't a large number of sales.

c) Because of (a) and (b) there's not really a well-defined price for
anything.

This situation represents the other extreme from publicly traded
stocks, for which the price of a given issue is widely known and trades
are frequent.

There are plenty of such markets, certainly not confined to records or
antiques.  So if the thought of old recordings bores you, read on - I
could be talking about ceramics or art or out-of-print books.  I'm
sure you must buy some such commodity.

When I first started buying online, I tried www.78rpm.com.  I would
bid what the Docks guide said the records were worth, but I never once
won an auction.  It wasn't just once or twice either, I didn't even
get one out of ten.  Finally, determined to win one even if I
overpaid, I won a record or two by paying significantly above what the
book had led me to believe they were worth.

Then I visited EBay.  Surprise: it was even more erratic.
Not-very-old records of well-known artists - such as a Frank Sinatra
record from the 1940's - would go for a few dollars.  Toss in the
shipping cost and you just paid $5-7 for a record you easily would
have run into in a Salvation Army.  You see, there were lots and lots
of these made - people had money to buy records after the War - and so
these disks aren't particularly valuable even today.  Or at least,
they're not valuable except on EBay.  On the other hand, some pretty
unusual stuff goes by sometimes, and you can pick it up for less than
you might think.

Recently I had a phone call with Kurt Nauck, the owner of Nauck's
Vintage Records.  I asked him about these phenomena I had discovered.
Our conversation, though brief, was edifying.

Why was it, I asked, that I couldn't win on his website?  Was the
Docks guide wrong?  Wasn't he afraid of the competition from EBay?

The Nauck's Auctions feature only records that have some intrinsic
value to collectors.  Someone who's looking for that Red Label
Columbia Frank Sinatra record won't find it in his catalogue.  If you
found a record in a store, Nauck told me, you really should expect to
pay what the guide said, but you can't always find what you want.
That's his job.  He makes his money bringing the good stuff together
where the serious collector can find it.  EBay does not.  Even Nauck
himself doesn't spend the time wading through all the junk that people
sell on EBay.  To top it off, the people who post on EBay don't always
know how to grade records - the better condition a record is in, the
more it's worth, obviously - and their ignorance increases his (and
my) reticence about bidding.  So, no, Nauck does not fear the
competition from EBay.  Oddly, this is true even though his buyers are
in some sense paying _more_ than the records are worth.  Nauck
succeeds in finding the people in the world who are willing to pay the
most for the records they buy, and he lets them bid against each
other.


Being a techie and all, I wondered if I could construct a model that
explains how prices get set in an illiquid market, and what happens as
the internet makes the market more liquid.  Not being an economist or
anything, I am making this up entirely.  There may be whole Ph.D.s
that have been written on this which I could find if I simply looked
around for them (on the web maybe?), but then I'd be spending more
time on this than I have.  I also thought of coding something to model
this in a program, but that would take time too.

Suppose you run a store that sells 78s, as a sideline probably to
whatever else you've got.  You can stamp any price you want on them,
but you want them to sell.  You know that you aren't likely to get
lots of people people walking in asking for old records, but there are
just enough for you to stay in the business.  You don't bother to
price them with the Docks guide, because most of what you sell isn't
even listed.  You get a new record to put out on the rack: it's
Clarice Vance singing "I'm Wise", Victor 5253, recorded in 1907.
There's someone out there who would gladly pay $15 for your record,
but she doesn't live in the neighborhood, and won't walk into your
store.  There are a few people around who will pay $10, but it will
sit on your shelf for a year if you price it there.  So you mark it $4
and sell it to one of the people who does find his way into your
establishment, and it goes in a month.

That's if you run a store; if you run Nauck's record auction it's
different.  Then, all the people who are in the know come to you.
That person who'll pay $15 for the Vance record is made to bid from
someone across the country who'll go to $20.

Now what would happen if information were more widely dispersed, if
buyers and sellers could always find each other?  Several things: (a)
The gap between what the store gets and what Nauck gets for the Vance
record should disappear.  The store would be able to find the best
buyer just as easily as Nauck.  (b) Everyone would know what things go
for, because they could see its trades in the market.  (c) Because of
this, the buyers of records should be willing to pay more for them;
each knows that she will always be easily able to sell - in fact, she
should be able to find the person who, at the moment of sale, is
willing to pay the most.  (d) The number of trades goes way up.

All told, I think that what happens is that the store prices go up
significantly, and maybe Nauck's auction prices come down a bit.  As I
said, this hasn't happened yet in the 78 record market, but maybe it
will.

What's interesting about this to me is, if I am correct here, these
illiquid markets are a place where the prices of commodities are
likely to go _up_ because of the internet - exactly the opposite of
what the web does to most things.  (At least that's what we tell our
clients: we expect that by using the web to sell they can reduce the
cost of selling, allowing them to keep prices down.)

I wish I could think of some way to make money out of my brilliant
insight.